Virgin Islands waits for rum subsidy

It’s mojito season in Washington, but for every bottle poured, the Virgin Islands is missing out on a payday.

That’s because a slice of a decades-old excise tax meant to help the rum-producing U.S. territories of Puerto Rico and the Virgin Islands is tangled up in stalled talks over extending a hodgepodge of expired tax breaks.

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The waiting game has the Virgin Islands facing the very real chance that Congress could drive them deep into debt.

Virgin Islands Gov. John P. deJongh, Jr. in recent remarks said he is held up in finishing the territory’s budget — in large part because of revenue loss from a missing rum subsidy.

“We’re still dealing with a fiscal year shortfall that we project at about $40 million,” he said. “We’re going to have to make some very drastic decisions about how we’re going to bridge that gap.”

The U.S. has already sent the territory an advance of more than $60 million with the expectation that Congress will eventually reach a deal, as it often does at the eleventh hour with these breaks. If Congress doesn’t act, the Virgin Islands will have to repay the funds.

How did a rum subsidy intended to fund development in the Virgin Islands, which also helps Puerto Rico, get tied to a batch of expired tax breaks?

The program, dating to 1917, is supposed to be simple: The U.S. collects a tax from rum producers and then transfers the money back to the Virgin Islands and Puerto Rico.

But that basic transaction turned into a headache when Congress added a temporary boost fifteen years ago. That’s when the rum subsidy got mixed up with the tax extenders, a batch of more than 50 unrelated tax breaks that expired last year and is now pending in Congress.

The temporary bit is the part that has expired — and which the Virgin Islands is counting on.

This dysfunctional break illustrates what is driving some to push for a tax code overhaul, in part, to trim scores of short-term provisions.

Meanwhile, critics call the program a kickback to rum producers — making it an easy target for chopping by budget hawks.

It is true that rum companies benefit. The Virgin Islands pays global rum giants Cruzan and Diageo, maker of Captain Morgan, about half of the rum add-on funds they receive.

But the payments were always intended to help the territories chase new investments — and the funds don’t come out of the pockets of U.S. taxpayers, said Del. Donna Christensen, the representative from the Virgin Islands.

“It is an import tax that the manufacturer pays that was always designed to go back to Puerto Rico and The Virgin Islands,” she said. “ It was always done with the intent that it would come back to the territories for economic development purposes.”

Puerto Rico, the other major rum-producing territory, is also missing out on the payment boost, but they are facing a far safer fiscal future. The territory receives a larger percentage of the permanent payment than the Virgin Islands, and earlier this year, Puerto Rico’s Gov. Alejandro Garcia Padilla said his government is on track for a balanced budget by next year.

The Virgin Islands, for its part, is facing a massive budget shortfall. The territory relies heavily on the rum funds to help close budget gaps.

Virgin Islands law requires that the governor submit a completed budget by May 31, a deadline now missed. In addition, many of the territory’s bond ratings were downgraded last year— leaving them perilously close to falling below investment grade